Is Noble A Better Buy Than Ensco?

Summary

Noble has created a strong footprint for future growth with its recent investments.

Noble is in a sound financial position and will be able to support both investments and returns.

Noble is a good long term investment Over Ensco.

The drilling industry has momentum as a result of the recent growth in the economic environment and the stabilization of oil and gas prices. Most of the companies in the oil and gas drilling and exploration sector have increased their capital spending in order to search for new sources of production. That is why the demand for drilling activities has improved over the past two years and will likely increase in the coming days.

As a result, the outlook for drilling and exploration companies looks to be bright. This industry continues to see deep and ultra-deepwater acreage as a strong area for growth. The Middle East remains an attractive region and the prime location of demand for high-specification jackup rigs. However, other regions like Australia, West Africa and South America have the promise of considerable production potential for exploration companies. Mexico and the Arctic regions also present attractive opportunities, as they hold about 13 percent of the world's undiscovered oil and about 30 percent of its undiscovered gas.

One company that will benefit from the increasing demand for drilling activities is Noble Corporation (NYSE:NE). This article will dig into the company's investments, future prospects and financial position to see where it stands in the current energy environment. It will also compare Noble to one its key competitors Ensco plc (NYSE:ESV).

Where Does Noble Stand?

Noble is one of the leading offshore oil and gas drilling contractors. Noble has a fleet of 77 offshore drilling units that includes three high-specification jackup drilling rigs and two ultra-deepwater drillships which are currently under construction. Their rigs are located throughout the world in locations that include Alaska, the Gulf of Mexico, the North Sea, Brazil, the Mediterranean, the Middle East, West Africa, Malaysia, India and Australia.

Noble is investing heavily to upgrade and enhance its fleet, so that it can continue to meet the demands that have been generated from increased spending throughout the entire energy sector. In 2013, the company added three new ultra-deepwater drillships, the Bob Douglas, the Don Taylor and the Globetrotter II. In addition, the company added the Mick O'Brien which is a high-specification jackup rig. These newly added ultra-deepwater drillships and the high-specification jackup rig have considerably increased the company's revenues. This was evident in 2013, when Noble's revenues increased to $4.2 billion from $3.5 billion in 2012.

Further, in 2014 the company took delivery of two more jackups, the Sam Turner and Houston Colbert. Both jackups are ready to start their operations in the Danish sector of the North Sea and Argentina respectively. Going forward, the company is expecting to take delivery of two more ultra-deepwater drillships by the end of this year. Noble is also expecting the delivery of three additional high-specification jackups by the end of 2014. With the addition of these jackups and drillships, the company will have a premium fleet mix. These new jackups and drillships will make it possible for Noble to grow both revenues and earnings in 2014 and beyond.

Ability to Sustain Returns

With the addition of their new premium assets, Noble increased its average daily revenues in the first quarter of 2014 to $223,600, representing a 5% increase from $212,000 in the fourth quarter of 2013. Fleet utilization also improved from the fourth quarter of 2013, because the newly built ultra-deepwater drillship's, the Bob Douglas and the Roger Eason, along with the newly built jackup rigs the Mick O'Brien and Regina Allen were in operation for all of the first quarter. With the addition of the new ultra-deepwater drillships and jackups in 2013, and at the beginning of 2014, the company's first quarter revenue increased by 7% to $1.3 billion compared to $1.2 billion in the fourth quarter of 2013.

Noble also significantly increased its cash flows. Its operating cash flow increased from $202 million in the first quarter of 2013 to $505 million in the first quarter of 2014. Its operating cash has in large part been used to provide support to the company's fleet expansion program and to other capital requirements. In the first quarter, the company invested nearly $517 million, of which $326 million went directly towards the company's fleet expansion program. There are plans to invest around $1.6 billion in 2014 to complete three high-specification jackups and two ultra-deepwater drillships which were mentioned above.

In addition to using cash from operations, Noble is using its commercial paper program to borrow cash for its fleet expansion program. Noble also has $1.03 billion available under a revolving credit facility. Although the company has been working on its fleet expansion program, it is still returning significant monies to shareholders in the form of dividends. In the first quarter of 2013, the company increased its dividend by 50 percent to and in the last quarter the company increased quarterly dividends to $0.3750/share. The addition of new rigs with increased average day rates should ensure further growth in the company's earnings this year. These earnings will enable Noble to generate significant growth in its cash flow, which will allow it to continue growing its dividend.

Where Does Ensco Stand?

Ensco offers offshore contract drilling services to domestic and international oil companies. Ensco operates in Mexico, the Gulf of Mexico, Brazil, the North Sea, the Mediterranean, the Middle East, Australia, West Africa and Southeast Asia. In order to meet customer demand and to satisfy their needs, it is investing heavily to upgrade its portfolio. It recently entered into several contract agreements. The agreements include the purchase of a premium jackup rig the (ENSCO 110), and the (ENSCO DS-10) both of which come on line in 2015. The company has also agreed to buy four ENSCO 120 jackup rigs. The first of four ENSCO 120 series jackups started operations in North Sea and two others from this series were also contracted before their delivery. Recently, Ensco placed an order for two high-specification jackups ENSCO 141 and ENSCO 140 which are likely to be delivered in 2016. The company has also agreed to buy four ENSCO 120 jackup rigs. The first of four ENSCO 120 series jackups started operations in North Sea and two others from this series were contracted for well before their delivery. Recently, Ensco placed an order for two high-specification jackups the ENSCO 141 and ENSCO 140 which are likely to be delivered in 2016. Further, the company is disposing of its old and low performing assets. Over the past three years, it sold 14 rigs for around $90 million.

For Ensco business is good, both it's floaters and jackups are generating strong year over year revenue growth. Even though the market for floaters has been soft, in the first quarter of 2014 revenues from floaters grew by 3% to $714 million. Its floater segment is growing because of the addition of the ENSCO DS-7 and ENSCO DS-6. In addition, the day rates for floaters increased by 18%. Ensco's jackup rig segment is also growing momentum. In the first quarter, this segments operational utilization was at 99%. In addition, contract backlog for Ensco's jackups reached a record level of $2.9 billion.

In terms of financial performance, the company's position looks strong enough to support its dividend and investment growth opportunities. With a $10 billion contract backlog, a $2 billion revolving credit facility, a long-term debt-to-capital ratio of 27% and about $123 million in cash and cash equivalents the company's cash position is strong. Further, Ensco is paying only 37% of income in dividends which I believe will not only allow it to sustain its dividend, but will give it the option of increasing it. The company is expecting 4% revenue growth in the second quarter with the commencement of operations of ENSCO 120 and ENSCO 121 series.

In Conclusion

ESV

NE

Industry Average

Price/Earnings TTM

8.3

10.0

11.7

Price/Book

0.9

0.9

1.3

Price/Sales TTM

2.4

1.8

2.1

Rev Growth (3 Yr Avg)

43.2

14.7

12.4

Net Income Growth (3 Yr Avg)

34.8

0.4

16.5

ROE TTM

11.5

9.8

8.3

Debt/Equity

0.4

0.7

0.7

Click to enlarge

Source: Morningstar.com

Both Noble and Ensco are trading at attractive multiples and both have the ability to provide solid returns for investors. With this in mind if I had to recommend investing in just one, I would recommend Noble. Ensco is on the way towards increasing profits because of the addition of its new floaters and jackups. Noble however, is better positioned with a revenue backlog of $14.3 billion, well-timed premium rig additions and strong client relationships. Further, in 2014, it will reduce capital expenditures thus increasing free cash flows. I believe that with the delivery of the final jackups and drillships at the end of this year the company will see a significant increase in its free cash flow. The increased cash flow will enable Noble to reduce its debt and increase its already generous ($1.50 annually with 4.9% yield) dividend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.